8 Construction Insurance Pitfalls You Should Avoid

Imagine receiving a phone call from your foreman, telling you about a big accident that just happened at the job site.

The accident involved a few pedestrians who are gravely injured and some property damage. It's tough not to feel rattled and worried when you get such news.

Of course, you have a Liability insurance policy in place, so it makes you feel better. It gives you peace of mind. You call your insurance agent, file a claim but after some communication with your carrier a grim reality sets in.

The insurance carrier is denying your claim. Or at least, it is not covering a significant portion of it.

If that happened to me, I would be absolutely terrified at the prospect of having to cover this claim out of my own pocket. I don't have hundreds of thousands of dollars laying around just waiting to spent on lawyers, medical bills, and court settlements. Do you?

Whether a claim goes south due to not having enough liability limits or an insurance company going out of business - the result is the same.

If your company is deemed responsible for a loss, it can cost you everything you have. Frankly, even if you are not found liable the cost of lawyers alone is enough to put you in debt for a very long time.

In the blog post below, we have detailed the eight most common pitfalls of construction insurance.

Reading this article and putting our suggestions into practice can potentially save you hundreds of thousands of dollars in unpaid claims.

Ready?

Let's get to it!

1. Carrying enough coverage

One of the biggest insurance pitfalls we see is not having enough General Liability and Auto Liability coverages. While it's tempting to purchase less coverage in an attempt to save money - don't do it! Truth is you won't save that much, yet the fallout from lower limits, if a loss happens, can be disastrous.

The minimum coverage that any contractor should have is $1,000,000 per occurrence / $2,000,000 per aggregate for General Liability coverage and $1,000,000 on Auto Liability.

A quick reminder of what "per occurrence" and "per aggregate" limits mean.

Per occurrence - a maximum of how much the carrier will pay out for any one claim. For example, if a limit is $1M and the total claim comes out to be 1.2M, the carrier will still pay only $1M.

Per aggregate - a maximum of how much the carrier will pay out for all claims combined in a policy period (typically a year). There is no limit on the number of claims the carrier will pay out on; however, the total dollar amount of all claims needs to total to the aggregate limit.

For example, if you had an aggregate limit of $2M and three claims of $900,000, $800,000 and $400,000 - the first two claims would be paid in full (total of $1.7M), and the last claim would only be paid $300K to hit the $2M aggregate limit. $100K could have to come out of your pocket.

Subcontractors and additional insured

The discussion about the limits also brings us to an important note - if you hire subcontractors, make sure that they carry a liability and auto liability policies with the same minimum requirements.

Additionally, it's important to request to be named as an additional insured on your sub's policy. If a claim arises out of their work, these two items will keep you protected.

2. Know your General Liability deductible

The concept of a deductible is used widely in the insurance industry. You may have encountered a deductible in your commercial property policy, contractor's equipment policy or your personal auto policy.

The concept of a deductible is simple: the insurance carrier makes you cover a small portion of the claim as a way to discourage small-time claims.

While common in property insurance products, you do not come across liability deductibles quite as often in most industries. In the construction world, however, in specific construction industries, the insurance carriers almost always require a General Liability deductible.

Of course, it's best to avoid liability deductibles if you can. However, if you work in those specific constructions industries that are considered risky enough to require a deductible always opt for a "per occurrence" deductible.

Ok, let's back up for a second here.

In a General Liability policy, you typically have one of these two deductibles: a per occurrence deductible or a "per claim" deductible. This might seem like a small difference, but in fact, it can be quiet costly.

First, let's define the difference.

An occurrence refers to the event that caused the loss. On a "per occurrence" deductible, you will be responsible to pay the deductible once. However, one loss may have multiple third-party claimants which result in multiple claims made to the company all related to the same loss event.

On a "per claim" deductible basis, you will be responsible for paying your deductible for every such claim.

Example

Here is an example to further illustrate the difference:

You have been hired to pave a road. Your guys have deemed the asphalt ready and opened it to traffic. Unfortunately, it was not fully cured yet. The result? The asphalt has gotten got on 200 cars and needs to be removed.

If you have a $500 "per occurrence" deductible, you will be responsible for covering the $500 and the insurance company will cover the rest. What if you have a "per claim" deductible?

A claim brought in by each one of these 200 damaged cars owners, is considered a separate claim for the purposes of our deductible discussion. If your deductible is on a "per claim" basis, you will be responsible for a whopping $100,000 of coverage ($500 deductible x 200 cars).

As we mentioned before, the difference can be very costly!

3. Using a reputable company

When buying an insurance policy, it's easy to focus on what's right in front of us - the price. Does the premium matter? Of course, it does!

Although, what matters more, in the long run, is purchasing from an insurance company that will fulfill its obligations when a claim happens.

We compiled a short checklist below, so you can make sure you are doing business with a reputable company:

- Check the company's financial strength: A.M. Best, Moody's and Standard and Poor's are all online resources that rate the financial strength of insurance companies. The rating committee assesses each company, assigns the rating and subsequently updates it as needed.

The ratings are designed to quantify how much you can trust any particular insurance company in fulfilling its obligations to the insured.

Simply said, the lower the rating, the more chances are that the company can go bankrupt and not pay your claim. This is just not a chance you can take!

The ratings are as follows:

A++, A+, A, and A-: ratings are given to companies in good financial health and considered "superior." These are the companies to do business with.

B++, B+, B, and B-: ratings are given to companies that are considered "good." While not as financially sound as the A-rated companies, they are still trustworthy. These companies are more likely to react to adverse changes or economic conditions.

C++ and C+: ranks are given to average insurance companies that are not in a very good financial position and are only considered marginal.

The last three ranks are ‘D’ (below standards), an "E" (under state supervision), and an "F" (company going into liquidation).

- Verify the claims process: An insurance company is only as good as its claims process. Consider requesting information in advance as to how the process works to avoid any unpleasant surprises.

4. Use a knowledgeable agent

This potential pitfall goes hand in hand with using a reputable company. Too many times we hear from clients who were burned by an agent that, frankly, had no idea what they were doing.

Sure these clients paid a low price for their policies, but did they get all the coverages they needed? Was the agent on top of any changes that might have needed to be made to the policy? Not always!

If you can, seek out an agent that specializes in contractors, or has extensive experience in insuring contractors. A specialization, in this case, is an invaluable asset. A few benefits:

established relationships with top contractor insurance companies - will be able to save you money or negotiate better terms and coverages

knowledge of what unique risks you face, what insurance products will fit your business and what gaps in coverage are leaving you exposed

understanding of the claims process and ability to advise and assist you in that critical time

Ability to handle urgent requests that are specific to your industry. Often items such as certificates of insurance need to be provided immediately so your guys can start the job. A good agent knows that and has a team in place to handle these requests.

When looking for an agent, it's best to go by word of mouth. Ask around in your industry. Whom do your fellow contractors recommend? When interviewing the agent, ask for references and who else they have represented.

5. Understand Your General Liability Rate

It's critical to understand how your General Liability premium is calculated to avoid unpleasant surprises at the end of the policy year. The most significant part of your premium is the rate that is based on your sales or payroll.

It's a misconception to treat your liability premium as a static number. The premium changes as your rate basis changes.

Here is what we mean:

If my premium is calculated based on my payroll (for example $11 per a thousand of payroll), then if my company grows and my payroll increases the actual premium will grow, while the rate remains the same. A final premium is a fluid number. The rate is the figure that stays the same.

Example

Let's continue with the previous example.

Your premium is calculated based on payroll, and your rate is $11 per a thousand of payroll.

At the beginning of the policy year, you provide your current payroll of $600,000, resulting in a premium of $6,600. During the year you pick up a few lucrative jobs, and your payroll grows to $1M.

What happens now?

It depends on your policy. Most carriers will reserve the right to audit you at the end of the year.

An audit is just a fancy word for checking your end of the year rate basis (in this case your payroll) against the original figures you provided. Insurance company calculates the actual premium they should have charged you based on your actual exposure, i.e., your updated payroll in our example.

Your true premium should have been $11,000. Since you already paid the $6,600, now you are responsible for the difference. On the flip side, if your sales or payroll are not as high as expected then you will often get money back.

Your company's growth gave the insurance company much more exposure. They need to charge adequate premiums to have good financial health and be able to cover your claims if those happen.

This lump sum additional premium comes as a shock to many folks. If your agent explains to you what your rate is and what basis it is being rated off of then there should never be any surprises.

If you see that your company is growing fast, it is a good idea to update your insurance company with your new payroll and/or sales figures. They will be able to break out the additional estimated charge into monthly payments or at least you'll be prepared that a big bill is coming your way.

6. Know who is carrying your Builders Risk insurance.

Builders Risk, otherwise known as a construction policy, is an insurance policy that covers the damage to your building, materials, and tools while under construction. A Builders Risk policy can be taken out by the owner of the project or by the contractor.

While it is definitely up for negotiation and can (and should) be discussed when you accept a job - the following strategy can help you avoid any uncertainty when it comes to Builders Risk coverage.

You can take out a blanket Builders Risk policy that will cover all projects initiated by you. This will ensure coverage with appropriate limits and eliminate and misunderstandings.

7. An annual review

A review of your business and your insurance portfolio with your agent is an often skipped step. However, this one extra step will bring a remarkable value to you, guaranteed!

Think back to the past year of your life - you might have started a business; bought a house; made new friends; lost touch with others; completed certification and so on. Regardless of what exactly happened in your life, when you start itemizing it - it's a lot!

Same goes for your business. Each year many changes may happen.

New equipment is acquired, and the old equipment is disposed of

Exposures change: you might have branched out into new construction specialties

Types of projects that you take on - maybe you decided to add on HUD projects in addition to single-family houses

Growth (or reduction) in payroll

Increase (or decrease) in sales

A review is designed to take a look at all the changes and make sure that all your exposures are protected correctly. It also gives you an opportunity to ask questions, discuss any concerns or discuss any upcoming changes and how they will affect your insurance policies, so you are prepared.

So you have your review scheduled. Now what? Come prepared!

Bring with you your current equipment inventory list, driver list and any other information that was used to underwrite your policy.

Be ready to discuss any material changes to your operations such as new type of projects, significant growth or reduction in staff or sales

Ask questions! Even though you can contact your agent with questions at any point, the review is a great time to get to the bottom of any doubts or concerns that you may have.

Don't hesitate to bring up the "what if" scenarios to understand how your policy will respond. This is a powerful exercise that helps you understand exactly how your policy works.

Quality over quantity mindset is essential when it comes to insurance. While there is certainly nothing wrong with wanting to pay less for your insurance policies, you should know exactly what it is that you are paying for. Don't sacrifice your coverage to save a few hundred dollars. An uncovered claim will be much more costly!

A good approach is first determining your coverage needs and then having your agent find you the best price within these parameters.

An annual review is a minimum that you should strive for. A semi-annual or a quarterly review is even better. A consistent review plan will help catch any changes or mistakes, keep everything current and avoid an uncovered loss.

8. Proper In-house Risk Management

Insurance is your last line of defense when a disaster happens. An effective in-house risk management program can prevent a lot of claims.

Your insurance broker is a great resource (if they are not, maybe it is time to look for another agent) on what things you should be doing to help mitigate your unique risks and reduce the chance of a loss.

Below are the common risk management strategies to consider:

Safety - Safety comes first. Institute safety training and mandatory use of safety equipment for all personnel. On a job site, you are responsible for the safety of your people, your clients and anyone else who may be just passing by the construction site.

Equipment Maintenance - A contractor relies heavily on his tools and equipment to do their job. A poorly maintained, prone to breakage equipment can cause severe injuries to the person using it and anyone around. Regularly scheduled, as well as prompt replacement of badly functioning pieces, will help minimize a chance of injury.

Contracts - contract (and waivers) are helpful to establish responsibilities and expectations between the two parties. They are not ironclad, and every court will see them differently, but they just may help you keep the dispute out of court.

On The Road Safety - When your business involves driving by multiple people on your behalf the chance of accidents escalates dramatically. Driver checks, proper licensing, defensive driver courses and consistent vehicle maintenance are all tools to keep you and others safe while on the road.

Conclusion

Construction insurance is not all about the price. In fact, focusing just on price can lead to the common pitfalls we outlined above.

With a lot of moving parts, construction insurance can get complicated, and lawsuits do get costly. Protecting what you worked so hard to build is of paramount importance.

Choosing a reputable company, doing an annual review, understanding your rate and other tips are all essential strategies to protect your business from an uncovered claim.